ECB’s Weidmann: Euro Level Not a Policy Target

The European Central Bank shouldn’t react to daily changes in exchange rates, Governing Council member Jens Weidmann said Thursday.

Speaking in a video interview with The Wall Street Journal after the German central bank released its yearly results, Mr. Weidmann reiterated that the level of the euro “is not a policy target for us.”

But changes in the exchange rate play a role in the central bank’s analysis in that they affect the outlook for inflation and economic growth, he said.

Pressed on whether the current strength of the euro increased pressure on the central bank to add more economic stimulus, Mr. Weidmann said: “We shouldn’t react to daily changes of the exchange rate.”

Rather, the central bank should reassess at regular intervals whether its policy stance is appropriate. “When we do that, then the exchange rate of course will enter” along with many other variables, he said.

The strength of the euro has been a source of concern, especially following the most recent monetary policy decision from the ECB at which it decided to leave rates unchanged and gave no hint of an imminent future move.

The stronger euro could potentially hurt a recovery in the currency bloc as it makes exports more expensive when priced in a foreign currency. The euro recently hit its strongest level against the dollar in 2 1/2 years, flirting with $1.40.

Some European policymakers have voiced concern about the euro’s gains. The head of Spain’s central bank, Luis Maria Linde, said Wednesday that a strong euro could potentially push the ECB to take more action. “A stronger euro may lead to an easier policy or a drop in inflation,” he said.

Mr. Weidmann reiterated that currently he saw no major price risks on either the inflationary or deflationary side in the euro zone.

“We anticipate a gradual recovery of the economy and that corresponds also to a gradual rise in the inflation rate from a lower level to a level that is just below our definition of price stability,” he said.

He added that a telltale sign of deflation–that consumers were putting off purchases in anticipation of lower prices–wasn’t happening.

He also took a swipe at one his favorite bugbears, the overstretching of the ECB’s mandate. He said that the German Constitutional Court reached a similar “negative conclusion” as he did when it said that the ECB’s untested bond-buying program, known as OMT, likely exceeded its mandate. He also cautioned against the ECB purchasing a wider pool of sovereign assets, which some experts think it should embark on to combat deflationary risks. “The legal issues that we saw with the OMT, that have been discussed with OMT, of course do not fully fade away when you buy a broader spectrum of sovereign assets.”

A program of purchasing sovereign bonds of all euro zone states, rather than just troubled ones, might actually be viewed more favorably by Germany’s constitutional guardians since there could be smaller price distortions, said Christian Schulz, an economist at Berenberg.

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